20140619-Maybank_KERPL-Regional_Materials_15页_1mb

Regional Materials Summary

Core Content

This document provides an overview of the current state and future outlook for materials, particularly metals, coal, steel, and related sectors in Asia, with a focus on China, India, Indonesia, the Philippines, Thailand, and Vietnam. It includes price trends, regulatory changes, company-specific news, and investment recommendations.

Main Points

• Iron Ore Prices:
  Iron ore prices are in a downtrend, nearing 2009 lows. The price gap with steel in China is narrowing, leading to improved profit margins for steel companies.

  • Forecast: Iron ore prices are expected to remain low in 2014 and possibly rise slightly in 2015.
  • Impact: Lower iron ore prices support steel producers, especially those with exposure to the railway sector.

• India Mining Sector:
  The new environmental minister is simplifying forest mining regulations, which is positive for companies with stalled bauxite, iron ore, and coal mining projects.

  • Hindustan Zinc's residual 30% stake may be sold to Sesa Sterlite, increasing SSLT's ownership to 94%.
  • This move is seen as fair given the company's low operating costs and long reserve life.

• Stainless Steel Trade:
  Eurofer has filed unfair trade cases against Chinese and Taiwanese stainless steel imports, which could be detrimental to Chinese producers and beneficial to European ones.

  • TISCO, China's largest stainless steel producer, exports to Europe and may face adverse impacts from trade measures.
  • The EU Commission is expected to open an investigation by the end of June.

• Pollution Measures in China:
  China is enforcing stricter pollution controls, resulting in significant fines for industrial companies.

  • This is part of a broader strategy to reduce crude steel capacity by about 70 million tonnes over the next few years.
  • However, plants are closing due to being obsolete and uneconomic, not necessarily due to government action.

• Zinc Prices:
  Zinc prices are moving upwards due to a global market deficit and strong Chinese demand.

  • Despite a 1% YTD increase, LME inventories have fallen by 27%, indicating strong demand.

• Share Recommendations:

  • Maanshan Steel is recommended as a Buy due to its high earnings leverage and rising railway business.
  • A pair trade is suggested: long Maanshan and short Angang Steel.
  • Outokumpu is recommended for the stainless steel trend.
  • Vale Indonesia and MMG are top picks for nickel and copper/zinc, respectively.

• Inventory Trends:
  Inventory levels for various metals are showing positive trends, which could support price movements.

  • Nickel inventory is in correction, while zinc is showing renewed vigor.

• Steel Market Outlook:
  Steel prices are expected to follow the trend of lower raw material costs with some moderation in downside.

  • Crude steel production in China is slowing but remains high, with a forecast of 3-4% growth in 2014.
  • Spare capacity remains high, posing a risk of higher exports or lower prices.

• Power and Coal Data:
  Coal inventory and power generation data show a weak price trend and high production levels.

  • Thermal coal prices are low, with a forecast of continued decline.

Key Information

• Price Forecasts:

  • Iron ore: USD102/t (2014E), USD93/t (2015E)
  • Coking coal: USD125/t (2014E), USD134/t (2015E)
  • Zinc: Showing a positive trend with a 1% YTD increase and 7% from mid-March lows.
  • Nickel: Correction is well advanced.
  • Copper: MMG is recommended as a Buy.

• Regulatory Impact:

  • India: Simplified forest mining regulations may revive stalled projects.
  • China: Stricter environmental policies and fines are impacting industrial sectors, especially steel and coal.

• Company Highlights:

  • Maanshan Steel: Benefits from increased railway spending and is a top pick.
  • Hindustan Zinc: Potential sale of 30% stake to Sesa Sterlite.
  • Outokumpu: Recommended for stainless steel trend.
  • Vale Indonesia: Top pick for nickel.
  • MMG: Top pick for copper/zinc.

• Market Outlook:

  • Steel industry in China is expected to see a slight improvement in profit margins.
  • High spare capacity and tight credit conditions pose risks to steel prices.
  • The global market deficit and strong Chinese demand support zinc prices.

Investment Strategies

• Pair Trading:

  • Long Maanshan Steel, short Angang Steel.
  • Long Outokumpu, short TISCO.

• Sector Focus:

  • Steel: Focus on companies with exposure to railway and value-added steel.
  • Metals: Favor companies with strong fundamentals and low operating costs.
  • Coal: Expect continued weak prices and high inventory levels.

Research Team

• HK/CHINA: Alexander Latzer (metals, coal, steel)
• INDIA: Anubhav Gupta (metals, steel)
• INDONESIA: Isnaputra Iskandar, CFA (metals, coal, cement)
• PHILIPPINES: Ramon Adviento (metals, coal)
• SINGAPORE: Yeast Chee Keong, CFA (oil/gas services, gem technology)
• THAILAND: Surachai Pramualcharoenkit (steel, construction, contractors, automotive)
• VIETNAM: Trung Thai (construction, materials, property)

Share Price Performance

• YTD and 3-month trends for materials, coal, and steel are presented with figures showing price movements and performance relative to the market.

Supporting Data

• Inventory Trends: Figures show the movement of inventories for various metals, indicating market dynamics and potential price support.
• Production and Consumption Trends: Data on steel and coal production and consumption in China, showing slowing growth and market adjustments.
• Price Comparison: Figures compare steel prices with input costs, highlighting cost trends and potential profit improvements.

Conclusion

The materials sector in Asia is influenced by regulatory changes, price trends, and trade policies. Companies in China, India, and Indonesia are highlighted for their potential to benefit from these changes, with specific investment strategies and recommendations provided. The outlook for the sector is cautiously optimistic, with some risks associated with spare capacity and market adjustments.